WHAT does Rep. Charlie Rangel have against his hometown, anyway? Anyone who didn't know better would think the "mother of all tax reforms" unveiled last week by the House Ways & Means chairman from Harlem was designed by rural populists to suck more juice out of the Big Apple.
Billed as providing "tax relief" for "hardworking families," the Rangel plan would dull the leading edge of economic growth in the metro New York region - with ripple effects on state and local tax revenues to boot. In the long run, taxpayers at every income level would suffer.
For New Yorkers, the most appealing aspect of Rangel's proposal is that it ends the Alternative Minimum Tax. Because the point where the AMT kicks in isn't indexed for inflation, it hits more Americans each year. And because it disallows both personal exemptions and itemized deductions for state and local taxes, its impact has been especially hard on home-owning families with children in the high-income, heavily taxed tri-state area.
Congress and the Bush administration have fended off the threat of heavier AMT bills each year by enacting a series of tax-code "patches." But this is just playing for time while the problem grows larger. Rangel would apply one more patch for 2007 - followed by repeal of the AMT thereafter. That's certainly nothing to complain about.
But where Rangel gives with one hand, he takes away with the other. His plan targets households with incomes over $200,000 - which now pay the bulk of the AMT - for a tax surcharge of at least 4 percent, rising to 4.6 percent for joint filers earning over $500,000. The resulting tax hike would hit some of these taxpayers harder than the AMT in the short run. In the long run, all would lose.
Worse, the surcharge would apply not to "taxable" income but to "adjusted gross" income over the threshold - meaning it would allow no itemized deductions and no tax preference for capital gains and dividends. (Compounding this effect, Rangel would also reverse President Bush's phase-out of federal limitations on deductions and exemptions for some high-income households.)
Keep in mind that this plan is sponsored by the same congressman who has spent much of his career inveighing against any proposal to repeal the deductibility of state and local income taxes. Apparently, it's now OK to triply tax some income on the federal, state and city level - as long as the losers are confined to that relatively small number of people who are nonetheless paying a disproportionate share of those taxes.
New York state's all-in tax price (the sum of local, state and federal levies) is already high, amounting to a record 37 percent of personal income. Rangel is seemingly oblivious to the consequences of raising it even higher.
Taxpayers in top brackets tend to have greater discretion over where they live, invest and base their businesses - and over the form in which they earn their income. It's well documented that when marginal tax rates drop, wealthy households shift more of their money from tax-exempt sources, such as municipal bonds, to taxable investments. When rates increase, they do just the reverse.
Thus, by targeting these economic decision-makers, Rangel's plan inevitably would depress revenue growth for states like New York - which depends heavily on income taxes from high-end earners.
Yet another aspect of the Rangel plan would raise taxes on the "carried interest" compensation of private-equity and venture-capital fund managers. As a tax-policy matter, strong arguments can be made on both sides of this issue - in isolation. But for practical purposes, on top of all the other increases Rangel has proposed, it would merely add to the likely negative fallout for New York.
The Rangel plan doesn't even deal with the biggest federal tax-policy challenge of all: the impending 2010 "sunset" of the Bush tax cuts enacted in 2001 and 2003. In fact, he literally banks on those cuts expiring to make his plan balance under federal budgetary rules. As a result, in just four more years, the middle-class and the wealthy alike would be hit with massive tax hikes.
There are some positive elements in Rangel's proposal, including a bump-up in the standard deduction and an increase in the deductibility of child credits for lower-income households. Most significantly, he would cut the corporate rate from 35 percent to 30.5 percent, while eliminating many tax loopholes. It's more than a little strange, however, that he recognizes the economic benefits of moving to a broader tax base and lower rates on the corporate side, while advocating just the opposite for individuals.
Taken as a whole, Rangel's "mother" is a stepchild of the old tax-hike two-step - shifting the burden to where incomes are larger but the number of voters is smaller, without regard for economic consequences. The sooner it is permanently shelved, the better.
Original Source: http://www.nypost.com/seven/10292007/postopinion/opedcolumnists/rangels_knifing_of_new_york.htm